AVAILABILITY
AND USE OF ALTERNATIVE FUELS

Transportation's Dependence on Petroleum
and Issues Relevant to Energy Supply and Price

Since the petroleum "shocks" of the 1970s, the
inflation-adjusted price of crude oil has generally declined until the spring
of 2000 when prices increased due to renewed resolve by OPEC and some non-OPEC
members to control crude oil supply to raise prices. Since the oil shocks of
the 1970s several events combined to keep oil prices low: the end of the Cold
War; a diminution in the market power of OPEC due to an increase in petroleum
production from non-OPEC nations; and the cementing of U.S. security ties to
the most important oil-exporting nations. Unfortunately, these developments
have engendered a complacency on the part of the American public not unlike
that which preceded previous oil shocks. The growing dependence of the U.S.
on imported petroleum offsets the positive developments that have occurred in
the global petroleum market over the past 20 years, i.e., the potential impact
of a petroleum shock on the U.S. is growing regardless of its origin or whether
it is politically motivated. Historically, periods of low prices have been followed
by steep price spikes, of which we have just recently been reminded.

Based on information collected by the EIA in 1999,
world crude oil reserves amount to about 1,000 billion barrels, and world natural
gas reserves amount to about 5,140 trillion cubic feet. Of this total, the Middle
East controls about 65 percent of the world's oil reserves and about 35 percent
of the world's natural gas reserves (the former U.S.S.R. controls another 38
percent of the world's natural gas reserves). North American reserves of oil
amount to just 6-7 percent of world reserves, and North American reserves of
natural gas amount to just 5-6% of world reserves. Today, the Persian Gulf region
holds about two-thirds of the entire world's known oil reserves. The U.S. imports
more than 53 percent of its petroleum-much of it coming from the Persian Gulf
region. EIA's Annual Energy Outlook 2000 estimates that this oil importation
will increase to 62 percent by the year 2010.

The world's oil resources are as concentrated
as ever in the OPEC nations, notably in the Persian Gulf. EIA projects that
by 2010, OPEC's market share is likely to reach the levels of the 1970s, as
its share of world supply grows from 41 percent in 1992 to 52 percent in 2000
to over 65 percent in 2020. In addition to concern about concentration of oil
resources, new concerns have recently been raised that the peak in oil production
could occur within ten years.(1) Economic growth
in the Pacific rim is giving rise to a growth in world oil demand that could
well lead to a short-supply situation within the next five to ten years. Recent
analysis by EIA indicates that the world oil production peak may not occur for
another 20 to 50 years.(2)
Regardless of when the peak is reached, crude oil prices are likely to increase
significantly in advance of peak production.

The costs to the U.S. economy from a future oil
price shock could be enormous. Based on analyses of previous oil shocks, recent
studies have estimated the macroeconomic impacts as reducing U.S. economic activity
by an average of over 2 percent per year for three to four years or more, which
translates into gross national product (GNP) reductions in the range of six
hundred billion dollars over threeyears, up to possibly $3 trillion over fifteen
years if thelost
economic growth were not subsequently made up.(3),(4)

Unfortunately, unlike other energy using sectors,
which have introduced substitute fuels and fuel switching flexibility since
the oil shocks of the 1970s and 1980s, the transportation sector remains overwhelmingly
dependent on petroleum-based fuels (approximately 95 percent of transportation
energy coming from petroleum) and on technologies that provide virtually no
flexibility. The transportation sector currently accounts for approximately
two-thirds of all U.S. petroleum use and roughly one-fourth of total U.S. energy
consumption. Highway transportation petroleum consumption has risen from 121
billion gallons per year in 1979, when CAFE was enacted, to 155 billion gallons
per year in 1999 (28 percent over 20 years). EIA's Annual Energy Outlook 2000
projects U.S. dependence on imported petroleum will grow to 54 percent in 2000
and 60 percent in 2005.

In light of this dependence of the transportation
sector on petroleum (and recent sharp increases in the price of gasoline), it
is clear that substitution of petroleum-based transportation fuels (gasoline
and diesel) by non-petroleum-based fuels ("replacement fuels," including alternative
fuels such as electricity, ethanol, hydrogen, liquefied petroleum gas, methanol,
and natural gas) could be a key means of reducing the vulnerability of the U.S.
transportation sector to disruptions of petroleum supply and have significant
benefits to the U. S. economy. Even moderate uses of alternative and replacement
fuels in place of petroleum can bestow significant economic benefits by reducing
the global demand and price for oil. Displacing petroleum
with alternative and replacement transportation fuels helps hold down petroleum
prices in two ways. First, reducing the demand for petroleum decreases the world
price for oil. Although the actual impact will depend on precisely how OPEC
responds, a reasonable rule of thumb is that a 1 percent decrease in U.S. petroleum
demand will reduce world oil price by about 0.5 percent, in the long-run. Short-run
(one year or less) impacts would be even greater, due to the short-run inelasticity
of oil supply and demand.

A second benefit of increased alternative and replacement
fuel use is its potential to reduce the impact of a supply shortage on prices.
As evidenced in the industrial and utility sectors, the existence of alternatives
to oil provides potential substitutes for oil in the event of a production cutback.
Since it is precisely the non-responsiveness of transportation oil demand to
oil production cutbacks that makes oil price shocks possible, increasing competition
for oil by using alternative fuelsreduces
the ability of oil suppliers to constrain supply in order to increase the price
of oil.

Availability of Alternative Fuels

The National Energy Policy Development Group,
in its May 17, 2001, report on the National Energy Policy states that, "The
lack of infrastructure for alternative fuels is a major obstacle to consumer
acceptance of alternative fuels and the purchase of alternative fuel vehicles."
The report further states that lack of infrastructure, "is also one of the main
reasons why most alternative fuel vehicles actually operate on petroleum fuels,
such as gasoline and diesel." The report's discussion of alternative fuel vehicles
includes the statement that, "ethanol vehicles offer tremendous potential if
ethanol production can be expanded." Additionally, the report states that, "a
considerable enlargement of ethanol production and distribution capacity would
be required to expand beyond their current base in the Midwest in order to increase
use of ethanol-blended fuels."

The National Renewable Energy Laboratory reports
that there are 5,236 alternative fuel refueling sites as of May 2001, with alternative
fuel refueling sites in all 50 states. In comparison, there were 4,676 alternative
fuel refueling sites in the U.S. in 1995. Unfortunately, while ethanol
is the alternative fuel that most of the dual-fuel vehicles that have been produced
can operate on, less than three percent of the alternative fuel refueling sites
offer ethanol.

The Federal government, and specifically DOE,
the General Services Administration and the Department of Agriculture are involved
with efforts to promote the use and expansion of alternative fuels and the alternative
fuel infrastructure. A major focus of these efforts is the development of different
feedstocks for ethanol and on partnerships that result in the expansion of the
ethanol fueling infrastructure.

DOE runs the Clean Cities Program, which unites
public-private partnerships that deploy AFVs and build supporting infrastructure,
with the common goal of building the alternative fuels market. Within these
partnerships reside fuel suppliers, which are continually committing to providing
facilities, fuels and services.

DOE also operates the Office of Fuels Development
(OFD), whose primary focus is on working to reduce the cost of replacing imported
oil with ethanol made from domestic resources such as corn fiber, bagasse and
rice straw. OFD programs look to the longer term, with efforts investigating
more advanced ethanol conversion technologies utilizing plants, trees and other
feedstocks grown specifically for energy purposes. OFD also includes a vital
outreach and educational effort under its purview - the Regional Biomass Energy
Program (RBEP). The specific goal of the RBEP is to increase the production
and use of bioenergy resources, and help to advance the use of biomass feedstocks
and technologies.

DOE and the General Services Administration (GSA) are jointly managing a program
called the Federal AFV USER Program, whose goal is to support the expansion
of an alternative fuel infrastructure by concentrating large quantities of Federal
AFVs and substantially increasing the use of alternative fuels in Federal AFVs
in six selected areas: Albuquerque, NM; Denver, CO; Melbourne/Titusville/Kennedy
Space Center, FL; Minneapolis/St. Paul, MN; Salt Lake City, UT; and the San
Francisco Bay area.

In August 2001, the USDA announced that its agencies will use ethanol fuels
in their fleet vehicles where practicable and reasonable in cost.
USDA's more than 700 E-85 flex-fuel vehicles will use ethanol fuel where those
vehicles operate in geographical areas that offer E-85 fueling stations, and
USDA agencies will purchase or lease alternative fuel vehicles, including
E-85 flex-fuel vehicles, for geographic areas that offer alternative fueling.

Presented below is information on the number of sites providing each alternative
fuel and some additional information on where these sites are located.

Ethanol: There are 121 ethanol (E85) refueling
sites in the U.S., up from 37 in 1995. Ethanol refueling sites can be found
predominantly in the Midwest, close to the major supplies of ethanol. Efforts
by DOE are underway in Minnesota to help construct a number of ethanol refueling
sites. As seen with the CNG, fuel suppliers can rise to meet the demand
by developing the necessary infrastructure. Although the trend in alternative
fuels is in the direction of E85 use, the infrastructure has been slow to develop
because these vehicles could use conventional fuel. However, it is important
to note that even if relatively few of these vehicles are actually being operated
on E85, it is still valuable to be increasing that capability throughout the
fleet because it could potentially contribute to the future transition away
from petroleum, could spur an increase in the number of E85 refueling sites,
and provide consumers an alternative if there are gas shortages or gas prices
increase significantly.

Further, studies have shown that refueling stations need at least 200 steady
customers for any single grade in order to make profitable use of the facilities.
Though large numbers of flexible-fuel vehicles are being sold, they are spread
out over the entire nation, and achieving a "critical mass" of 200 that use
a single refueling station is still difficult to achieve. The small number of
outlets available today points out the need to intensify the E85 refueling infrastructure.
In addition, it is safe to say that many people who have purchased flexible-fuel
vehicles do not know they could use E85. More public education in areas where
E85 refueling stations exist is needed to inform people so that they are aware
they can use E85.

Methanol: There are only two methanol (M85)
refueling sites in the U.S., significantly down from 88 in 1995. Both
of these sites can be found in California. The
total number of methanol (M85) refueling sites has been dropping in the past
few years, due to the lack of M85-capable flexible-fuel vehicles.

Natural Gas: There are currently 1,237
CNG refueling sites and 44 LNG refueling sites in the U.S., up from 1,065 CNG
refueling sites in 1995. Natural gas refueling stations are usually located
in urban areas near the major concentrations of natural gas vehicles, and are
frequently constructed on a company's site to serve its fleet vehicles.

Electricity: There are 558 electric recharging
sites in the U.S., up from 188 in 1995. The vast majority of electric recharging
sites can be found in the Southwest (California and Arizona), where the majority
of electric vehicles are being sold. There is also a large concentration of
electric recharging sites in Alabama and Georgia, where electric utilities have
been proponents of electric vehicles. The availability of public refueling is
not as important for electric vehicles as it is for other alternative fuels,
since most (if not all) operators of electric vehicles will have a charger located
at the vehicle's storage yard or garage to recharge the vehicle when it is not
being used.

Liquefied Petroleum Gas (LPG): There are
currently 3,270 propane sites in the U.S.. LPG is sold throughout the U.S. as
a home heating fuel, and many stations offering refueling of propane tanks also
offer vehicle refueling.

Biodiesel: There are currently four biodiesel
refueling sites in the U.S. The National Biodiesel Board counts seven major
suppliers of biodiesel as members, located mostly in the Midwest. Biodiesel
can be pumped through conventional diesel refueling equipment, so widespread
availability of biodiesel would not pose a major obstacle with respect to infrastructure.

As of May 2001, there were 121 public E85 refueling
outlets in operation. For LPG, the most widely available alternative fuel, although
it has availability in all states, there are only 3,270 outlets in the U.S.
These outlets require little maintenance. There are 1,237 CNG outlets in the
U.S. For M85, there are only two refueling sites remaining. There are 44 LNG
outlets, and 558 electricity outlets in the U.S. As illustrated in the following
table and in Appendix C, this adds up to a current total of 5,236 alternative
fuels refueling stations in the U.S.

Table IV-1NUMBER OF ALTERNATIVE FUEL
REFUELING OUTLETS

ALTERNATIVE
FUEL INFRASTRUCTURE

Fuel

Total Number of Outlets

E85

121

Electricity

558

LPG

3,270

CNG

1,237

LNG

44

M85

2

Biodiesel

4

Total outlets

5,236

The costs to retrofit an existing gasoline tank
for E85 range from $5,000 to $30,000. For a new, underground tank and pump,
the price ranges from $50,000 to $70,000. For LPG, the installation cost of
a new outlet is $25,000 to $40,000. For CNG, the installation cost for an initial
outlet is $250,000 to $500,000.

Energy Equivalence of Alternative
Fuels to Conventional Fuels

The table below illustrates the amount of each
alternative fuel necessary to provide the same energy as a gallon of gasoline
or diesel fuel.

Table IV-2ALTERNATIVE FUEL EQUIVALENCY

CNG

LNG

Propane

Methanol
M85)

Ethanol
E85)

Biodiesel
B20)

Gasoline

125 scf

1.5 gal

1.4 gal

1.8 gal

1.4 gal

0.9 gal

Diesel

139 scf

1.7 gal

1.5 gal

2.0 gal

1.6 gal

1.0 gal

It is difficult to calculate a gasoline equivalency
for electricity because the conversion of a fuel to energy is not done onboard
the vehicle, as with an internal combustion engine, but is merely stored on
the vehicle in batteries. For the purposes of the EPA Fuel Economy Guide, energy
consumption by electric vehicles is reported in terms of kilowatt-hours per
100 miles. For purposes of corporate average fuel economy, a petroleum-equivalent
fuel economy is calculated using a petroleum equivalence factor of 82,049 Watt-hours
per gallon. This factor takes into consideration the relative efficiency of
the electricity production and distribution infrastructure, the energy content
of the electricity, and a fuel content factor. To illustrate the results of
this calculation, the electric Ford Ranger has a city rating of 38 kWh/100 miles
and a highway rating of 44 kWh/100 miles, or a combined rating of 41 kWh/100
miles. This corresponds to a petroleum-equivalent fuel economy of 202 miles
per gallon using the above factor.

Fuel Prices Relative to Gasoline and
Diesel

A survey of Clean Cities was conducted in April
2000 to determine average prices for alternative fuels across the nation. Table
IV-3 illustrates the average retail prices determined as a result of this survey.
As this table shows, compressed natural gas cost less per gasoline-equivalent
gallon (GGE) than gasoline, but LPG and ethanol cost more per GGE. No price
estimates were available for methanol or for biodiesel, but both would probably
be more expensive than gasoline or diesel fuel.

Table IV-3
SELECTED FUEL PRICES AS OF APRIL 10, 2000

Gasoline

$1.52 / gallon

Methanol

n/a

Diesel

$1.42 / gallon

Ethanol

$1.80 / GGE

CNG

$0.89 / GGE

Electricity

$0.07 / kWh

LPG

$1.62 / GGE

Biodiesel

n/a

Use of Alternative Fuels

Alternative fuel use in the U.S. has grown significantly
since the passage of AMFA alternative fuel incentives, as illustrated in Table
IV-4. In 1992, alternative fuel use in the U.S. amounted to 230 million gasoline
gallon equivalents; in 2000, alternative fuel use is estimated to be 368 million
gasoline gallon equivalents, an overall increase of 60 percent.(5)

As seen in Table IV-4, all of the alternative
fuels have seen notable increases in use between 1992 and 2000, with the exception
of methanol (neat and in M85) and ethanol in an E95 blend. The rise in CNG and
LNG usage is due to an increasing number of CNG and LNG vehicles available from
original-equipment manufacturers. A large increase in ethanol (in the form of
E85) has also occurred, due to increased interest in E85 spurred by the large
numbers of E85 flexible-fuel vehicles being produced by the domestic manufacturers.

Electricity has also enjoyed a large increase,
due to the OEM offerings of electric vehicles in the Southwest.

Methanol usage and E95 usage have experienced
a decline between 1992 and 2000. Methanol usage in a blend of 15 percent gasoline
(known as M85) has not seen an increase, and it is likely that this alternative
fuel use will decline further in the coming years, due to a lack of methanol
flexible-fuel vehicles being offered. The large decrease in neat methanol use
can be attributed to neat methanol's popularity as a transit bus fuel in the
early 1990's and the phase-out of these vehicles within the last four or five
years. The small amount of E95 (ethanol blended with 5 percent gasoline) can
be attributed to a small fleet of transit buses; it is not likely at this point
that this use will increase in the coming years.

Change in Rate of Alternative Fuels
Consumed

Alternative fuel use in alternative fuel vehicles
in the U.S. has been rising over the past decade. In 1992, EIA estimated that
a total of 230 million gasoline gallon equivalents of alternative fuel were
used in alternative fuel vehicles; for 2001, that number is projected to rise
to 366 million gasoline gallon equivalents, or an increase of roughly 6 percent
per year. In comparison, the highway use of gasoline and diesel was about 133
billion gallons in 1992, and that number is projected to rise to about 164 billion
gallons in 2001, or an increase of roughly 2 percent per year. Thus, alternative
fuel use in alternative fuel vehicles has been rising at a rate three times
faster than the total highway use of gasoline and diesel. Nonetheless, alternative
fuel use only accounts for 0.22 percent of total highway fuel use.

Alternative Fuel Use Relative to Total
Energy Consumption

In 2000, according to EIA, the U.S. consumed about
99 quadrillion BTU of energy (equivalent to about 859 billion gallons of gasoline)
in all of its energy-consuming activities. Transportation activities (road,
air, water, and rail) represent about 27 percent of that total, or the equivalent
of about 243 billion gallons of gasoline. Highway transportation consumption
was about 157 billion gallons, or about 67 percent of total transportation energy
usage.

Ethanol: Ethanol is used either as E85
to power flexible-fuel vehicles, or blended into gasoline to make gasohol. In
2000, the U.S. used about 1.0 billion gasoline gallon equivalents of ethanol
in these two uses.

Methanol: Methanol is used either as M85
to power flexible-fuel vehicles, or as MTBE blended into gasoline as an oxygenate.
In 2000, the U.S. used about 3.1 billion gasoline gallon equivalents of methanol
in these two uses.

Natural Gas: In 2000, the U.S. used about
18.8 quadrillion BTU (or about 163 billion gasoline gallon equivalents) of natural
gas (excluding natural gas used to make electricity). Natural gas use in transportation
is estimated to represent about 0.06 percent of that total, or 98 million gasoline
gallon equivalents.

Liquefied Petroleum Gas (LPG): In 2000,
the U.S. used about 2.7 quadrillion BTU (or about 24 billion gasoline gallon
equivalents) of LPG. LPG use in transportation is estimated to represent about
1.0 percent of that total, or 243 million gasoline gallon equivalents.

Electric: In 2000, the U.S. used about
3.4 trillion kilowatt-hours of electricity. Electric use in transportation is
estimated to represent about 0.002 percent of that total, or 57 million kilowatt-hours.

Biodiesel: No estimates have currently
been made of the amount of biodiesel being used in the U.S.

Ethanol Supply and Demand

Due to the water quality concerns regarding MTBE
and the rapidly increasing number of E85 flexible-fuel vehicles, the supply
and demand of ethanol was specifically examined. Information about current ethanol
supply capacity, as well as information about ethanol plants being constructed
and ethanol plants being planned, was taken from an ethanol supply and demand
analysis performed for the Renewable Fuels Association. This report indicated
that currently, ethanol production capacity in the U.S. is about 1.72 billion
gallons per year. Plants under construction can add another 123 million gallons
per year, and plants in the engineering and planning stages can add another
149 million gallons per year. The analysis assumed that the plants being constructed
and the plants being planned would all be online in 2003, providing a total
ethanol production capacity of about 1.99 billion gallons of ethanol per year.
A straight line extrapolation results in estimated 2010 production capacity
of about 2.6 billion gallons per year. This represents an increase in production
capacity of about 4.3 percent per year.

Ethanol in gasohol was assumed to be a constant
percentage of highway gasoline use, based on current gasohol use of 1.1 percent
of highway gasoline, taken from EIA alternative fuels information. The increase
in ethanol use in gasohol is due to EIA projections that gasoline use will continue
to increase in the 2000-2010 time frame. It is projected that the use of ethanol
in gasohol will increase from about 1.2 billion gallons in 2000 to about 1.6
billion gallons in 2010.

Based on this analysis, the ethanol supply remaining
for ethanol use in flexible-fuel vehicles is the difference between the total
ethanol supply and the ethanol use in gasohol. (This analysis did not make any
estimates of the replacement of MTBE with ethanol in gasoline.) It is estimated
that the amount of ethanol available for use in flexible-fuel vehicles increases
from about 400 million gallons in 2000 to about 1 billion gallons in 2010.

MTBE Phase-out

Since ethanol is the alternative fuel that most dual-fuel vehicles are capable
of operating on, it is important to note the current water quality concerns
regarding MTBE, an additive used to increase the oxygen content of gasoline.
If MTBE is banned as a gasoline additive and fuel producers replace MTBE with
ethanol, it is uncertain if there will be enough refinery capacity to both replace
MTBE and to fuel flexible-fuel vehicles a substantial portion of the time with
E85. Because of this situation, along with the small number of ethanol refueling
stations nationwide coupled with the growing number of vehicles capable of using
ethanol entering the marketplace, some special incentives to spur the development
of an E85 refueling supply and distribution network might be warranted.

Summary

EPACT was enacted to encourage the use of alternative
fuels and replacement fuels (non-petroleum components of conventional fuels),
by setting goals of replacing 10 percent of motor fuel use in 2000 and 30 percent
of motor fuel use in 2010 with alternative fuels or replacement fuels. The intent
of EPACT was to accomplish the goals through mandates that require certain fleets
to purchase and use alternative fuel vehicles. EPACT does not, however, mandate
any level of alternative fuel usage in the vehicles acquired. Since EPACT was
enacted, alternative fuel use has risen from 230 million gasoline-gallon equivalents
to 368 million gasoline gallon equivalents, and replacement fuel usage (MTBE
and ethanol in gasohol) has risen from 1.9 billion gallons to 4 billion gallons.
Nonetheless, while the availability and use of alternative fuels has
increased since the inception of the CAFE credit incentive provision, it has
not nearly kept pace with the increase in the number of alternative fuel vehicles.
Due to the lagging development of the alternative fuel infrastructure, the vast
majority of dual-fuel vehicles rarely operate on alternative fuel.